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Margin requirements based on a stochastic correlation model

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  • Dávid Zoltán Szabó
  • Kata Váradi

Abstract

We demonstrate that margin requirements of central counterparties show a significantly different behavior when calculated with a portfoliowise treatment instead of taking the weighted sum of the margin requirements of the components without accounting for their correlation structures. This is shown via simulating trajectories of a joint stochastic volatility–stochastic correlation model. Results indicate that an unnecessarily large overmargin requirement is set by regulators when the applied risk measure is not calculated via a portfoliowise treatment. Finally, accounting for the correlation structure of the assets during the margining process would not lead to an overly prudent method, nor would it cause greater procyclicality.

Suggested Citation

  • Dávid Zoltán Szabó & Kata Váradi, 2022. "Margin requirements based on a stochastic correlation model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(10), pages 1797-1820, October.
    • Handle: RePEc:wly:jfutmk:v:42:y:2022:i:10:p:1797-1820
    DOI: 10.1002/fut.22360
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